Monday, March 4, 2013

Driving Over the Fiscal Cliff

With Friday's deadline for the sequester now past, it might be time to take stock of how this whole Fiscal Cliff matter was resolved. You'll recall, Ben Bernanke first coined this term in respect to several contractionary forces that faced the US economy at the end of 2012. These items included the sequester, the expiration of the Bush tax cuts (including dividend and capital gains), the expiration of the payroll tax cut and the imposition of the Obama health care tax.

The months leading up to December 31st were filled with great theater, fueled by the Obama administration's fear mongering and the gravitational pull toward sensationalism by the news media. Reports were widely circulated that the Fiscal Cliff would result in some $600 billion of combined spending reductions and tax hikes, enough to snuff out a fragile economic recovery and send unemployment soaring. JP Morgan broke out the effects of the various tax and spending items on its forecast for 2013 GDP as follows:

At year end, America breathed a collective sigh of relief as politicians reached a stumbling, bumbling eleventh hour aversion to the crisis, as the always weepy Boehner knuckled under while the triumphant Obama prevailed on his new found goal of deficit reduction through tax hikes for the wealthy. Nothing much else happened at year end, other than the tax hikes and of course, a swift punt of the remaining issues to a later date.

Surprisingly to us, economists, politicians and pundits alike now cheer the outcome as we tipped away from the precipice. But now, less than 90 days later and taken in the context of Friday's relatively uneventful start to the sequester, it might make sense for us to re-examine what really happened up there on that cliff.

Of the four elements to the cliff (tax hikes on the middle class, tax hikes on the wealthy, expiration of the payroll tax cut, imposition of the ObamaCare tax and the sequestration) all, with the exception of the tax hike on the middle class have now taken place. From a total of $600 billion in projected fiscal drag, perhaps as much as a total of $400 - $450 billion of these measures are now in effect.

So, by most measures, we went over the cliff. Albeit, from lower elevation than we had been warned, but still likely high enough to hurt. Add to the pain, the projected $150 billion in further drag from higher gasoline prices and it looks like we're going to get a good peak at just what was beyond that cliff after all.